With apartments and other commercial real estate, it’s common to talk about a “value add” or a “value play.” These are basically improvements that you can add to a property to increase the property’s value more so than the cost of the improvement.
Thus, “value add” investors are often looking for a property they can upgrade or alter in some way to increase value instead of simply investing in a performing asset and getting a certain return.
While most single family investors think in terms of buying and rehabbing a property to be all in for 70 or 75 percent of its market value, there are also value-add opportunities that can drastically improve your ability to get the highest rent or sales price out of a single family home.
How to Estimate Rehab Costs!
Estimating rehab costs accurately can make or break your real estate business, and it takes years of experience for even the best rehabbers to master the art. However, you can expose yourself to less risk and get more accurate with your projections by learning how the pros think when estimating construction costs.
1. Adding a Bedroom
The most important time by far to add a bedroom is when you have a 2-bedroom house, although this is only true if the house has enough square footage. Indeed, when you have more than three, sometimes you can afford to lose one. We had a house with four very small bedrooms once. People tend not to like small bedrooms, so we simply cut out a wall between two of them, and then instead of refinishing the hardwoods in that room, we added carpet to hide where the wall was on the floor. Yes, we lost a bedroom, but there was now an awe-inspiring master bedroom to impress prospective tenants.
Now, the reason it is so important to have at least three bedrooms if possible is that most families who have kids want at least three bedrooms. That’s true even if they only have one child because often the third bedroom is used as an office. And given that, if you have a house with two decent sized bedrooms and can only make a small third, it’s probably worth doing.
There are several things to look for when attempting to add a bedroom. The first thing you have to note is that unless you plan on building an addition (an expense that I don’t believe is usually merited), you will need to sacrifice something for that extra bedroom. You must ask yourself, what are you willing to sacrifice?
The best situation is when there is a bonus room. You do not want to turn all of your common areas into bedrooms. You’ll need at least a living room and preferably a living room and a dining room. But houses often have a bonus room or something to that effect. As long as it’s large enough — in most cities, 10 feet by 10 feet — all you need to do is add a door (maybe a wall) and a closet, and you’ve got a bedroom. And if the tenants who move in want it to be a bonus room, they will still have that option.
Also, be on the lookout for extra large living rooms. You don’t want to get rid of most of the common area, but some houses, particularly some older ones, are just laid out ridiculously. Taking a slice out of one of those rooms to add a bedroom has made sense for us on more than one occasion.
Related: 8 Clever Ways to Save Big Bucks on Your Next Fix & Flip
And, of course, there are more drastic ways.
2. Garage Conversions
I am usually not a fan of garage conversions. For one, they usually look awkward, even if you replace all the siding in front. Most of the time, it just seems like something is missing when you look at a house with a garage conversion. Indeed, a study by G. Stacy Simans and David A. Macpherson found that a garage added 13 percent to a property’s sales price, while an additional bedroom added only 4 percent with square footage being held constant.
That being said, there are times when garage conversions make sense to do.
There is a large subdivision called Ruskin Heights in Kansas City that is rather depressed. Virtually every house there is a 3-bed, 1-bath ranch. Many of the tenants in this area are on Section 8. And since the amount Section 8 pays is partially based on the number of bedrooms, many investors converted the garage to an additional bedroom.
There might also be situations where a house has only two bedrooms, but both an attached and detached garage or a 2-car garage. In these cases, it would sometimes make sense to convert the garage.
3. Finishing Basements and Attics
OK, I will note that I am almost always against finishing a basement. I have walked into far too many REOs with half-finished basements that some hapless homeowner thought they could take out a second mortgage on to finish before it all inevitably went awry. This is doubly true since many appraisals won’t even count bedrooms, bathrooms, or square footage in finished basements (even walkouts). Instead, they just check a box titled “finished basement” and give you a little adjustment.
For me to even consider finishing a basement, the following things must be true:
- The neighborhood is strong.
- It is a walkout basement (one side is above ground, one is not) with easy egress.
If both aren’t true, forget about it.
If it is a walkout basement, finishing it might make sense, though — especially with basements that already have solid walls and some sort of ceiling over the floor joists. For example, the following picture is in a finished “basement” because the other side of the house is below grade:
Appraisals may not always consider this space, but buyers and renters sure will.
Just make sure any bedroom you put in a basement has an egress window (one someone can get out of) in case there’s a fire. It’s against code for a bedroom not to have this.
And one more quick note. Even if a basement is not a walkout, but is orderly and preferably (although not necessarily) has a ceiling, painting the walls white and the floor grey makes it come to life as a sort of semi-finished basement. And it’s really cheap to do:
4. Making a Half Bath Whole and Adding Bathrooms
Some half bathrooms are really small, and there’s just nothing you can do. But if there is extra space, it’s a good idea to finish it. That expense will almost always pay for itself. From that same study noted above, a full bathroom adds 24 percent to the price, whereas a half bathroom only adds 15 percent.
Stand-up showers just don’t take up that much space. So, for example, if a bathroom looks like this:
It very well is worth adding a shower since you’ve got the room, even though you’d have to move the toilet and replace the vinyl to do so.
As far as adding a full bathroom, unless it is a huge house, I would only consider it if the house had only one bathroom. Other than that, it really depends on the value of the house and whether there is space for it. In lower-end neighborhoods, it would generally not make sense. But in higher-end neighborhoods, it very well might. This is especially true if there is a genuine master bedroom that lacks a master bath. In those cases, I would likely add one.
5. Opening Up the Kitchen
There is nothing that sells a house like the kitchen. Any confined, closed-off kitchen simply won’t do. Sometimes, however, there’s no good way to add space to a kitchen. Luckily, you can still make it feel open by opening up a wall to the living or dining room. It could be as simple as cutting a rectangle in a wall. And you can even add a bar top to that for an added bonus.
Here’s an example of one such god-awful kitchen we had:
Now just look at the difference opening up that wall and adding a bar top made:
And even something like this helps immensely:
6. Adding Storage
If a house has neither a garage nor a basement, it is probably a good idea to add a shed in the backyard. People like their stuff and need some storage for it. You can buy a shed from Home Depot of Lowes for less than $1,000, and a lot of prospective renters and buyers will need something like this in order to sign on the dotted lines.
7. Improving the Aesthetics (Particularly the Front)
Never underestimate the power of aesthetics. Even small things can make the difference. Compare the following two pictures of the same 4-plex:
All we did here was paint the trim, add window boxes and awnings, and it completely brought the property to life.
Or even something more simple, like this:
There are all sorts of easy fixes like this that add far more value than they cost:
- Repaint the front or just the trim
- Wash the house or power wash if need be
- Add window shutters
- Add window boxes
- Add window awnings
- Remove ugly window awnings
- Remove satellite dishes
- Replace an ugly exterior light fixture
- Paint the front door
- Replace the mailbox and/or address numbers
- Weed kill the driveway
- Hedge the trees and bushes in front as well as basic lawn care
- Add bark mulch to the front yard
- Plant grass if the lawn is dead
- Add paver stones if there is no walkway to the house other than the lawn
- Repair any unsightly fences or gates
- Add some arborvitae or other plants
There are certainly other ways to add value, including more drastic measures, such as mother-in-law quarters, turning the house into a duplex, adding an addition, etc. But for the most part, the above ideas can add substantial value to any flip or rental, and you should be at the ready to use them when the time comes.
What additions or renovations do you add to properties to increase value?
Let me know with a comment!